Disconnected

The bill-signing at the Library of Congress was meant for the history books.
To mark the passage of the Telecommunications Act of 1996, President Bill Clinton flourished a pen used by Dwight Eisenhower to approve the legislation that created the interstate highway system in 1957. The signing marked the birth of the "information superhighway," Clinton told his audience, opening up the highly regulated phone industry to competition and giving consumers new choices in local telephone service. One day soon, he said, rival companies will offer you low-priced packages that bring not only local telephone service, but also long distance-service, Internet access and cable television into your home for one fee.

After signing the bill on paper, Clinton picked up a digital pen and signed a second copy that was instantly sent around the world on the Internet. To mark the technological revolution promised by the new law, comedian Lily Tomlin appeared on a video link, playing her character Ernestine the telephone operator and replacing her famous "one ringie-dingie" opener with "one gigabytie."

Colorado was already exploring this new electronic frontier. In 1995 the state legislature had passed a bill sponsored by Representative Tim Foster that called for opening the local telephone market to competition. Lawmakers predicted that Colorado would be one of the first states to give the public cheap access to an array of telecom services. An alphabet soup of telephone companies announced their intent to compete with US West for local service: industry giants like AT&T and MCI WorldCom, as well as dozens of small startups that saw an opportunity to enter what had long been a monopoly market.

MCI WorldCom, which already had a calling center in Colorado Springs employing several hundred people, made ambitious plans to offer local business and residential service. In the fall of 1997, the company did a test run on residential phone service, using 2,000 employees who had volunteered to be guinea pigs.

The eight-week trial was a fiasco. Phone lines suddenly went dead, people received services they hadn't requested, and bills were scrambled. When the company put service orders through to US West, as often as not, the phone line was simply disconnected.

"The US West system failed," says Bill Levis, western states policy director for MCI WorldCom. "We began initial testing with the US West operating system to transfer service from US West over to us. That computer service never worked."

In order for any telephone in Colorado to function, it has to be linked to the US West network through a huge computer program known as the Operational Support System, or OSS. That system allows the phone company to process calls, connect with other networks and handle billing, maintenance and repair requests. Under the federal Telecommunications Act, all regional phone companies such as US West (often referred to as the "Baby Bells" after the breakup of Ma Bell almost two decades ago) are required to make the system available to competitors. But Levis insists US West has never done this.

"Their computer system still doesn't work, and they won't allow a third party to test that system," he says.

Instead of the local telephone competition promised by state and federal lawmakers, Colorado has seen bitter infighting and finger-pointing. In the past few years, US West and its competitors have filed numerous complaints and appeals with the state Public Utilities Commission, which regulates phone service in Colorado. US West has gone to court seventeen times to overturn PUC decisions mandating competition.

The state's longtime monopoly phone-service provider, which still controls 98 percent of the phone lines here, has been fighting on other fronts, too. It has secured its status as a political powerhouse, pouring money into state legislative races and into the 1998 campaign of Governor Bill Owens.

Now US West is seeking political payback. A US West-backed telecommunications bill is expected to be introduced this week in the legislature by Representative Jack Taylor of Steamboat Springs. While the final details of that legislation aren't yet known, it's certain to resemble other US West-backed bills that have been introduced in New Mexico, Oregon and several other states. Those bills call for massive deregulation of US West, giving the Baby Bell extraordinary new power to set rates without government oversight and putting in place new requirements for competitors that may stifle any hope of real competition.

The head of the Oregon utilities commission describes US West's bill in his state as a "rape of the rate-payer" and says US West hid its agenda behind a "Klingon warship cloaking device." In New Mexico, US West hired ten lobbyists, including a former governor, a former attorney general and the son of a prominent senator, to push through a similar bill.

If comparable legislation is approved in this state--and it may well be--consumer advocates warn that Colorado telephone customers will be the losers.

"It would be a disaster to consumers to deregulate US West in every market," says Ken Reif, director of the Colorado Office of Consumer Counsel. "One of the worst things you can do is to allow a monopoly to be deregulated when there's no competition. Then you have the worst of all possible worlds: an unregulated monopoly."

An unregulated monopoly that stands to make millions, which explains US West's full-court press in the Colorado statehouse. In its proposed measure for Colorado, US West promises to invest millions of dollars in rural areas, a plan that appeals to legislators like Taylor, who fear their constituents may be left out of the telecom revolution. But the Baby Bell isn't just vowing to spend money in the future: It's spending hundreds of thousands right now. The company has hired so many lobbyists and flexed so much muscle this year that even veteran politicians are astonished.

"We've had some discussion about renaming the Senate chamber 'the Senate chamber brought to you by US West,'" says Senate Minority Leader Mike Feeley, US West's most prominent critic in the legislature.

Will Coloradans ever see real competition for their local phone service? Other states, most notably New York, are far ahead of Colorado in opening up their local phone markets. But for Coloradans, the promises made three years ago are still nothing but rhetoric. Instead of trying to win over new customers, US West and its competitors have spent their time in endless skirmishes in the courts, before the PUC and in the legislature. And if the measure expected to be introduced this week passes, the fighting will become even more intense.

"Now the only real competition is for lawyers," says Levis.

Even though there are now 22 companies offering some type of local phone service in Colorado, almost all of the competition for customers is focused on business districts along the Front Range. Businesses are heavy users of telecom services, and phone companies can make far more money on business lines than on residential ones.

According to US West, its rivals are "cherry picking" lucrative business customers in downtown Denver and the Denver Tech Center, with no intention of ever serving residences or rural areas.

"If you have new competitors coming in and only taking the cream of the crop, who's there to help the little guy?" asks David Beigie, spokesman for US West. "When it comes to serving people in rural areas and minority neighborhoods, they're not interested."

Beigie claims the competition now under way for business customers in Denver threatens US West's ability to provide telecom services to the rest of Colorado. "A lot of our valued customers are leaving," says Beigie. "What that means is that we have less money to serve the rest of our customers. They're going to take all that money, and none of it will be invested in rural or poor areas."

As a regulated monopoly, US West is required by the PUC to be the "provider of last resort" for rural areas in Colorado, meaning that the company must provide service if no one else does. Under this system, rural rate-payers pay the same basic rate--$14.93--as urban residents, even though it costs US West far more to serve rural areas.

Many of the companies now competing against US West acknowledge that their first priority is to serve business customers, but they say that's part of the evolution of competition. New phone companies naturally go after the most profitable accounts first, they say, and once the business market has been tapped out, those companies will be eager to jump into the residential market.

Still, if they can't find a way to connect to the US West system, these rivals warn, they'll never be able to offer service to homes in Colorado.

"It's part of our business plan to offer local residential service to all our customers nationwide," says Carolyn Berthelette, spokeswoman for MCI WorldCom. "But now, if you send US West hundreds of change orders, their system crashes."

US West's competitors point to the opening of the long-distance market as an example of how alternatives to the monopoly take time to put down roots.

"In the 1970s, the long-distance market became open to competition," notes Greg Allen, who is in charge of government affairs in AT&T's western region. "The new entrants resold AT&T's long-distance minutes. From day one, they were able to serve residents and businesses." The new competitors eventually put their profits back into equipment, and now there are several long-distance companies that have full-blown independent networks.

Several factors make the creation of competitive local phone service more difficult, Allen adds. The easiest way to generate local competition would be for US West's competitors to "resell" its service, like AT&T did. Under this scenario, a competitor would simply slap its name on service that was being handled entirely by US West's network.

While AT&T was required to give discounts of as much as 50 percent to its competitors, the profit margin on local service is smaller, and most Baby Bells like US West only offer discounts on resale in the 18 percent range. "With those types of discounts, you can't resell local service profitably," says Allen.

That leaves companies like his with only two options to get into the local market: They can build their own system--a multi-billion-dollar undertaking--or try to lease pieces of the US West network.

AT&T recently bought the Denver-based cable-television empire TCI for $48 billion. The TCI purchase was the latest in a series of mergers that have shaken up the telecom world, as huge corporations try to win the upper hand in the technologically volatile information age. Many of those companies are convinced that the first provider who can offer local and long-distance phone service, Internet access and cable in one package will dominate the marketplace and reap billions in annual profits.

"The customer wants one-stop shopping," says Allen.
Cable-television wires can be upgraded to carry telephone service, something AT&T plans to do, but that will cost billions of dollars and take years to implement. For now, AT&T, like most of the other local providers, is dependent on trying to lease part of the US West operating system so that calls can be routed to their customers. And that, according to several different phone companies, is exactly where the problem lies.

"We have 100 customers waiting to be connected," says Sue Williams, spokeswoman for Next Link, which offers service in metro Denver. "We have a lot of held orders because US West doesn't have the interconnection facilities we need. It takes sixty to ninety days for them to be connected. That's our biggest bottleneck."

Williams believes US West is intentionally delaying the connections to frustrate competition.

"If there's not enough capacity, our customers will reach a busy signal," she says. "A customer who just came over to Next Link would think, 'This never happened with US West.' We have to take the blame."

US West's Beigie scoffs at his competitors' claims that they don't have full access to Colorado's telephone network. He says it's just a pretext for them to avoid serving residential customers.

"How is it that the system works for them when they're serving a lucrative business customer but not for a little person in a town they don't want to serve?" he asks. "It's an excuse-of-the-month club."

Competitors insist they can offer business service now only because businesses will tolerate delays in getting hooked up in return for substantial savings. To make a profit in the less-profitable residential market, they say they'd have to put through thousands of new orders at one time, and US West's system would fail.

MCI WorldCom couldn't risk offering residential service, says Levis, since customers would blame any malfunctions on them. The company offers service to large businesses in downtown Denver and the Denver Tech Center through its fiber-optic network, but Levis says MCI WorldCom can't begin to serve small-business and residential customers until it has dependable access to the US West network.

"We want to make sure when we offer local service that it's at least as good as our long-distance service," he adds.

One local company is actively marketing residential telephone service in Colorado. McLeod USA serves several medium-sized cities along the Front Range, including Fort Collins, Loveland, Longmont and parts of Boulder. McLeod grew so frustrated trying to access US West's operating system, it opted instead for a thirty-year-old automated system known as Centrex.

For years large companies have used Centrex, which simply lets heavy telephone users control the lines into their offices. McLeod sells space on its Centrex system to residential users. The company's rates are the same as US West's, but customers get three-way calling, call waiting and call transfer for free.

"It's no secret we've had some disagreements with US West," says Dave Conn, McLeod's vice president for regulatory affairs. "We've had several cases before the PUC where we think US West has treated us unfairly."

Consumer advocates call US West the most belligerent of all the Baby Bells in resisting competition. At the same time, its competitors' complaints about gaining access to its network are echoed across the country. New York State has made the most progress in opening up its market, in large part because regulators decided to bring in a neutral third party to oversee Bell Atlantic's operating system.

That third party, international accounting firm KPMG, has found that linking Bell Atlantic's network to its rivals was far more complicated than they expected. Engineers with KPMG have spent seven months testing the system, which has failed forty times during that period. But Bell Atlantic has made enough progress getting the system to work for competitors that it may be on the verge of receiving the ultimate reward from federal and state officials: permission to offer long-distance service.

The federal Telecommunications Act tried to give the Baby Bells an incentive to open up their operating systems to rival phone companies: Congress said that if the Baby Bells cooperated with their competitors, they would be allowed to sell long-distance service to their customers. It was hoped that the opportunity to reap new profits from selling long-distance would encourage the former telephone monopolies to work with their challengers.

In February, MCI WorldCom began offering service to local businesses and residential customers throughout New York. That state's consumers will be the first in the country to enjoy real competition for their local telephone service. MCI is offering local service at a 5 percent discount off of Bell Atlantic's standard rates. Regulators in Texas are also moving quickly to open up that state's local telephone market.

Competing telephone carriers in Colorado are now demanding a solution similar to the one in New York, with a third party overseeing US West's operating system. "Right now we have a fox in charge of the hen house," says AT&T's Allen. "Giving the company that's losing market share administrative authority is a losing proposition."

Many consumer advocates agree. "If United Airlines owned all the runways out at Denver International Airport, that would be a real problem," says Ken Reif. "Here, US West owns the network. The Telecommunications Act underestimated the difficulties with this."

In January, the PUC ruled that there should be third-party testing of US West's operating network and told US West and its rivals to come up with a list of suitable firms that both sides could trust to test the system. The PUC will soon choose a company to conduct trial testing.

US West's challengers, however, fear that state lawmakers may kill off phone competition before it really begins. "They're trying to get from the legislators what they couldn't get from the regulators," Allen says of US West. "The greatest fear for the consumer is that the legislative process picks winners and losers and denies consumers the benefits of competition."

US West's efforts to change the rules governing the phone industry have made front-page news across the company's fourteen-state territory.

The US West-backed bills introduced in Oregon, Utah, New Mexico and Washington call for freeing the company of government regulation. In return, US West promises to cap rates and invest in telecommunications services for rural areas.

US West has been pushing these bills--hard. The most sensational allegations against the Baby Bell come from Utah, where the company has been accused of using a $5 million contribution toward the 2002 winter Olympics to get Governor Mike Leavitt to support its legislative agenda.

In the wake of the Olympic corruption scandal--Utah supporters of the games admitted offering cash and goods to members of the Olympic site-selection committee--US West said it was withdrawing its multi-million-dollar support of the games. But on January 16 the company announced it was renewing its commitment to the Olympics, and two days later, Leavitt endorsed US West's bill in the state legislature.

After consumer advocates accused the governor of being bought off, however, an angry Leavitt withdrew his support.

In Oregon and Washington, the company's proposal has been attacked by public utilities commissioners. The chairman of the Oregon Public Utility Commission, Ron Eachus, has been giving speeches around the state describing the company as "US Worst" and accusing it of engaging in "economic blackmail."

The New Mexico state Senate passed the bill by one vote after the unprecedented US West lobbying blitz that brought ten full-time lobbyists to Santa Fe, including former governor Toney Anaya and former attorney general Hal Stratton. The company made sure to include both Democrats and Republicans among its all-star cast of professional ear-benders. The bill now sits on the desk of Republican governor Gary Johnson, awaiting a signature.

In Colorado, US West spent thousands of dollars in last November's election, helping to make sure one of its favorite former legislators, Republican Bill Owens, made it into the governor's office. Owens received $1,000 contributions--the legal maximum--from US West's political action committee, several of the company's executives and a host of lobbyists and lawyers who represent US West. The company also gave freely to dozens of state legislators, pouring more than $12,500--most of it in $200 chunks--into the campaigns of politicians in both parties.

Recipients of the company's largesse included Speaker of the House Russell George, House Majority Leader Doug Dean and Senate Majority Leader Tom Blickensderfer.

AT&T and MCI also made political contributions, but their efforts were far more modest.

And just in case their efforts to elect friendly legislators weren't enough, US West also assembled the most high-powered legislative lobbying team in recent memory. In the unfolding legislative battle, the phone giant's biggest coup thus far has been recruiting well-known lobbyist Steve Durham. Durham had previously represented the Coalition for Fair Telecommunication Policy, which is made up of US West's competitors. Durham's defection to the other side was a huge blow to the coalition, since he has numerous ties to legislators and is widely regarded as an expert on telecom issues.

"Steve Durham has helped a lot of people get elected," says Mike Feeley. "We're going to have a hell of a fight on our hands."

Disclosure forms filed with the state show that US West is paying Durham $48,000 a year for his services, although he's likely collecting more, since only a portion of lobbyists' income has to be reported. Besides Durham, US West has hired a stellar crew of professional skid-greasers, including Frank "Pancho" Hays, Karen Reinertson, Wally Stealey and the powerhouse law firm of Brownstein Hyatt Farber & Strickland.

Bill Owens was the clear favorite of US West in the governor's race. The company and its top executives--including former CEO Dick McCormick and his wife, Mary, as well as Kevin Smith, who runs the company's Colorado division--made numerous contributions to Owens. (Those donations were mostly in the $500 range, a figure that wouldn't bust the bank for US West's busy execs. McCormick received a $24.5 million "golden parachute" when he retired last year, and new CEO Sol Trujillo recently got a 19 percent raise, upping his annual salary to $1.4 million.)

US West also docks the paychecks of several dozen of its top executives to fund its political action committee. For instance, McCormick contributed $272 per month while he was with the company, and Trujillo currently donates $97 per month.

Direct contributions to candidates are now capped in Colorado as a result of a 1996 initiative approved by voters. To get around those limits, big spenders last year poured hundreds of thousands of dollars into political "education" groups that were technically independent of candidates but still spent money promoting their campaigns. Those contributions are exempt from disclosure requirements, so it's not known who funded the efforts. But many political veterans believe that US West put money into Centennial Spirit, an "educational" group that worked to elect Republican candidates, including Owens.

"I would suggest that much of that money came from US West," says Helen Anderson, who worked as AT&T's lobbyist in the State Capitol for fifteen years before retiring last year.

Anderson says Owens has been a friend of US West's for years. "He's always been their boy," she says. "During the whole time I was there, I can't remember a single time he voted with our coalition."

US West's favored status in the Owens administration was highlighted during the January inaugural ball, where local companies lined up to buy expensive sponsorship tables. US West donated $50,000 to the event, more than any other company, and US West bigwigs like Trujillo enjoyed a private reception with the new governor.

Owens spokesman Dick Wadhams says the governor hasn't taken a position on the telecom issue. "He won't get involved until something arrives on his desk," says Wadhams. He also insists that Owens is not in the pocket of US West, adding that the governor "has an open mind on telecom issues."

But many consumer advocates question why a regulated utility needs to spend so much money trying to influence legislation.

"They have a multi-billion-dollar cash cow that we've paid for, and they use that money to fund political campaigns," says Chuck Malick of the Colorado Public Interest Research Group. "I've always felt that it's a problem that a government-protected monopoly makes these kinds of contributions."

US West knew that this legislative session would be important to its continued profit potential. Early in the session, minority leader Feeley introduced a bill that would give the PUC authority to levy substantial fines against US West if the commission finds the company hasn't allowed competitors access to its operating system. That measure, which was passed by the Senate and is being considered by the House, is supported by US West's challengers.

Jack Taylor's yet-to-be-introduced bill, on the other hand, may call for removing the company from significant government oversight.

Since the bill is still being written, Taylor says he can't discuss it. "Until I get that legislation done, I don't want to get into the nuts and bolts of it," says Taylor.

However, Westword has obtained an early draft of the bill that reveals the general direction in which Taylor is heading. The bill is similar to the pro-US West legislation that has been introduced in other states. The draft calls for deregulating much of US West's business, including in-state long distance, directory assistance and private lines that are used by Internet service providers. It would also free the company from any regulation of advanced services, which include high-speed Internet lines, voice mail, caller ID and other features.

"It's a blank check for US West," says a state regulator.
The draft bill would leave in place a freeze on residential rates that US West has already agreed to. (Ironically, just a few years ago, the company was claiming it urgently needed to hike residential rates ["Dial "M' For Monopoly," July 11, 1996].) But the proposal has a large loophole that would allow the phone company to hike those rates in the future. By deregulating depreciation--an accounting term that refers to the decrease in value of a company's property through wear and tear--US West would be able to set its own depreciation rate and let customers pick up the bill.

"If they depreciate as fast as they can, the higher costs can be passed on to consumers," says Malick.

The draft would also require all phone companies to offer both business and residential service, a provision that US West's competitors say might drive them out of Colorado. "We won't be able to offer business service, because we can't comply with that requirement," says AT&T's Allen.

Much of Taylor's bill is geared toward rural Colorado. The draft would require that all advanced services available in urban areas also be offered to rural residents. That means someone who lives in Rangely would have the right to the same high-speed Internet access enjoyed by a business in the Tech Center. The multi-million-dollar cost of such a plan would be borne by rate-payers.

While phone companies are eager to hook up urban areas, they often see rural Colorado as a financial sinkhole. Taylor says his constituents want to have the same choices as people in Denver. "The farther out you go, the less quality, quantity and speed you have," he adds. "I want to improve that on a statewide basis."

One proposal reportedly being considered by Taylor would hike the average phone bill in Colorado by 30 percent to pay for those rural upgrades. People on both sides of the telecom issue agree that there needs to be some way to help fund service in rural Colorado, but many say it's not fair to ask Denver residents to pay substantially higher phone bills to fund high-speed Internet service in Cortez.

"How much do we think we should spend on this?" asks Reif. "It's a very thorny problem, and it all comes down to dollars."

US West's strategy to help push through Taylor's bill will revolve around a pitch to rural legislators. In the other states where similar bills have been introduced, the company promised to spend $40 million per year to improve rural telecom service. The company will make the argument that it is the only telephone company with a commitment to serving rural areas.

US West's Beigie says rural Colorado is in "horrible danger" of losing out in the new world of telecommunications.

"Right now our competitors can ignore these customers," he says. "All the competitive focus is put on those with the most money. Durango would like to be able to compete for services, but these companies just focus on downtown Denver and the Tech Center. They just go after the best of the best customers. It's a very clever strategy on their part."

In the meantime, however, US West has been discarding some of these same rural customers. The company recently announced that it intends to sell off 500,000 rural telephone lines in ten states. Cities the phone company plans to abandon in Colorado include Alamosa, Crested Butte, Fairplay, Gunnison, Leadville and Salida. US West says it will use the cash from those sales to invest in areas where it's being challenged by competitors.

"It makes you question their sincerity," the OCC's Reif says. "Generally, the only reason they're serving rural areas is because they have to. They've deployed their advanced services in urban areas first."

Promising similar services to rural legislators is one way to win votes on the deregulation proposal. "They really play on the emotions of rural legislators and whip them up into a frenzy," says Feeley. "They're trying to steamroll it. They'll use every emotional argument they can muster to make people think the world will end if US West doesn't provide them with phone service."

While Front Range lawmakers dominate the General Assembly, rural legislators still control a significant block of seats--thirteen in the House and seven in the Senate. Now Colorado's elected officials will have to decide if they really want the marketplace competition they support in theory.

"We expect it to be a war," says COPIRG's Malick. "I'm terrified that we're about to deregulate a monopoly when we don't have local competition. This is like the Titanic, a sinking ship for consumers."

A few weeks ago, Malick himself found out just how overboard US West has gone. When Colorado's in-state long-distance market was opened to competition on February 8, Malick tried to switch his in-state carrier. A US West sales agent told him that a "freeze" had been placed on his account, and he couldn't choose another company for that service without getting the freeze lifted.

Like thousands of other people, Malick had asked US West to freeze his out-of-state long-distance service so he wouldn't fall victim to "slamming," the practice of some long-distance companies that switch customers' accounts without permission. But Malick, a veteran consumer activist who frequently lobbies the state legislature on telecom issues, was startled to discover that US West had unilaterally extended that freeze to include his in-state long-distance as well.

He had to haggle with US West to get the freeze lifted.
"For me, it was a big hassle," says Malick. "If I didn't know how this industry works, I would have hung up and forgot about it. But if they make it hard for people to switch, it can be big money for them."